26th Jul 2023 14:48
(Alliance News) - Rolls-Royce Holdings PLC now looks a world away from the criticism once levelled at it by Chief Executive Officer Tufan Erginbilgic, after it said full year results will be materially above market consensus.
Its shares jumped 20% in response to 182.70 pence in London on Wednesday afternoon. In the year-to-date the stock is up 96%.
"The turnaround in the shares since the start of the year has been remarkable, even more so given the comments from new CEO Tufan Erginbilgic at the end of last year when he labelled the company as a 'burning platform'," said CMC Markets analyst Michael Hewson.
interactive investor's Victoria Scholar also noted the "incredible run" of Rolls-Royce shares so far this year.
It seems that Erginbilgic has won over the market. He had described Rolls-Royce as a "burning platform" just days into his stint as CEO. Then in February, Rolls-Royce reported well-received annual results.
On Wednesday, the London-based jet engine and power plant manufacturer said it expects to report first-half underlying operating profit of GBP660 million to GBP680 million, well above consensus of GBP328 million and the GBP125 million achieved in the first half of 2022. Free cash flow is estimated at GP340 million to GBP360 million, versus consensus of GBP50 million, and negative GBP77 million a year before.
Rolls-Royce explained that this reflects improved margins, led by its Civil and Defence arms, thanks to higher volumes, "commercial improvements", and cost savings. Margins in Power Systems narrowed in the first half but are expected to improve in the second half, the company said, on the back of price hikes.
Rolls-Royce upped its full-year expectations in response to the strong first half. It now expects underlying operating profit of GBP1.2 billion to GBP1.4 billion in 2023, versus consensus of GBP934 million, and free cash flow of GBP900 million to GBP1.0 billion, versus consensus of GBP732 million. These compare to underlying operating profit of GBP652 million and free cash flow of GBP505 million in 2022.
On the back of this, Shore Capital's Jamie Murray upped forecasts for Rolls-Royce, too. Shore Capital expects to upgrade its earnings before, interest and tax forecasts by about 20% to 40% for the current year.
"We will enquire with management about outer year forecasts but suspect more modest upgrades will be encouraged," he added.
Hargreaves Lansdown Steve Clayton said the boost in guidance, reflects "one of the largest improvements seen so far in the current reporting season."
"The company is benefiting from a recovery in flying hours by the airline industry, which is pushing more aircraft into the workshops for engine overhauls," Clayton said.
Meanwhile, ii's Scholar added: "Things couldn't be going much better for CEO Tufan Erginbilgic who took to the helm at the start of the year. His transformation plan across divisions is clearly bearing fruit with a sharp improvement in its operations, the post-covid revival in flying hours as well as increased defence spending on the back of the war in Ukraine."
On Wednesday, Erginbilgic moved away from describing Rolls-Royce a "burning platform."
Instead, he said: "Our multi-year transformation programme has started well with progress already evident in our strong initial results and increased full year guidance for 2023. There is much more to do to deliver better performance and to transform Rolls-Royce into a high performing, competitive, resilient, and growing business."
On the back of the update, the FTSE 350 aerospace and defence index was up 4.6%, at 6,615.82. ii's Scholar noted that the sub-index is "on track for its best one-day gain since August 2021".
Full half-year results will be released on August 3.
By Sophie Rose, Alliance News reporter
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